Receiving Wide Coverage ...
Schneiderman vs. JPMorgan, Day Two: JPMorgan Chase tells the Journal that New York Attorney General Eric Schneiderman's lawsuit alleging securities fraud by JPM predecessor institution Bear Stearns "recycle[s] claims already made by private plaintiffs." Specifically, a lot of the profanity-laced trader emails and statistics cited by Schneiderman were also in a suit filed against JPM by the bond insurer Ambac. Moreover, a member of Schneiderman's staff worked on the Ambac case at a previous job with a private law firm. An anonymouse tells the paper that after JPM pointed out this connection in a meeting, the staff member was recused from working on the investigation "out of an abundance of caution." The FT says the case "is expected to be the first in a new wave of US regulatory action against banks for alleged wrongdoing in the run-up to the financial crisis." The Journal's "Heard on the Street" column similarly calls the Schneiderman suit "a reminder that the mortgage boom and bust remains a live issue," even if "the worst losses from housing may be behind banks." The Times' "White Collar Watch" columnist Peter J. Henning parses the complaint and finds "little new information" about the boom-era Wall Street mortgage securitization machine that wasn't already public. However, he spots one novel allegation: that Bear Stearns pocketed the money it collected when forcing originators to buy back loans that defaulted early, rather than passing these proceeds on to investors. "If true, that goes beyond just shoddy practices to something much more akin to theft," Henning writes. Another Times article notes that Schneiderman brought his claims under the Martin Act, a long-time weapon of choice from the arsenal of Empire State prosecutors.
That's Some Gross Imagery: PIMCO's Bill Gross compares the U.S. government's reliance on debt to crystal meth addiction and warns that if the problem isn't solved, bond prices could be "burned to a crisp."
The Scarlet 'SIFI': AIG disclosed that it's on the short list of companies that the Financial Stability Oversight Council may brand as "systemically important financial institutions." Just as a reminder, being designated as "important" in this context isn't necessarily a compliment. Wall Street Journal, Financial Times
Wall Street Journal
The FHFA has put on hold Freddie Mac's plan to finance investor purchases of foreclosed homes to rent them out. The conservator is "concerned Freddie's cheap debt would make it difficult for banks to compete for the growing number of buyers of foreclosed homes" and that "Freddie's involvement would deepen the government's role in the nation's real-estate economy."
New York Times
An article looks at political attack ads that play up candidates' ties to "Wall Street," which is even more loosely defined in this context than usual. Consider Keith Rothfus, a nebbishy-looking Republican lawyer running for Congress in Pennsylvania whose firm drafts software-licensing agreements and counts BNY Mellon as a client for this prosaic work. Or as his Democratic opponent calls him, "Millionaire Wall Street lawyer Keith Rothfus," who "represented a Wall Street bank that received a bailout from taxpayers."
Could BlackRock's Larry Fink replace Tim Geithner as Treasury Secretary if Obama is reelcted? The Post plays the parlor game of "What a second-term Obama economic team might look like."
The New Yorker: The magazine's "Money Issue" contains a few items of note. First, there's the zeitgeist-encapsulating satirical cover, depicting a cartoon capitalist (top coat, top hat, monocle) literally taking candy from a baby. JPMorgan's Jamie Dimon makes a cameo appearance in a feature article about why billionaires feel victimized by Obama. And "Financial Page" columnist James Surowiecki, taking a broad look at "Corporate Welfare Queens," calls the banking industry "the most obvious example" of how "government boosts business profits via regulation." The FDIC, Surowiecki writes, "encourages people to deposit money in banks, and the biggest banks also benefit from the perception that the government will not allow them to fail, which enables them to borrow money at a low cost." Later, he writes of business regulation in general: "Vested interests … explain why so many states have onerous licensing regulations. … Such regulations, which have grown precipitously in recent decades, are catnip to incumbent businesses worried about competition." Of course, scholars ranging from George Stigler (Milton Friedman's colleague in the laissez-faire Chicago School) to Gabriel Kolko (a lefty whose work is nevertheless often cited by free-market devotees) have been making that point for decades. Though Surowiecki doesn't specifically mention banking in this context, there are recent examples of regulations that may serve the interests of incumbent financial players by creating barriers to entry: Think of the California Money Transmission Act of 2010, which has reportedly stifled start-ups in the payments space, the most contentious example being Think Computer's FaceCash service. To be fair, even if licensing requirements and other regulations constrain competition, surely that isn't the sole purpose or function of every single one. Maybe some rules genuinely protect the public along with the cartels. You wouldn't want to use an unlicensed brain surgeon, would you? (Surowiecki readily concedes that corporate welfare has public benefits; his main point is that "companies that benefit from these policies are just as dependent on the government as the guy who gets the earned-income tax credit.") Still, whenever some politician or regulator proposes a new net worth or training or registration requirement for a given line of work, it's always worth asking who will really benefit. One aside about that headline: We've long thought that "welfare queen" is a redundant term, since any monarch is, by definition, a ward of the state.